Natural Resources and the Washington Consensus

In a recent interview on the Canadian Broadcasting Corporation, I reacted to statements by Patrick Bond on Africa’s export of raw materials and on structural adjustment policies. I said that the problem with natural resources was not that Africa exports them, but that many African governments have not used the revenues from these resources productively. On structural adjustment, I said that policies followed by the better-performing African countries over the last 15 years were quite similar to those of the Washington consensus, but the difference was that these policies emerged from a domestic political consensus rather than being imposed from abroad.

Patrick has responded in a blog post, accusing me of “schizophrenia…mischievousness…[and] bizarre claims.” In order to hear what others have to say, I reproduce my response below.

Patrick:

Thanks for bringing the discussion to the blogosphere, where we can communicate directly rather than through a CBC radio interviewer.

On your first point, we need to distinguish between accounting exercises, such as those in the World Bank’s book, Where is the Wealth of Nations, and measures of economic welfare. Measures of genuine savings deduct the amount of a resource that has been depleted from regular savings to account for the reduction in natural capital. This deduction does not by itself indicate whether human welfare, which is what we are all interested in, has gone up or down. The reason is that, with any natural resource, there is an optimal rate of depletion that maximizes economic welfare, and that rate is typically not zero. So the relevant question for signaling directions of welfare is whether the current rate of depletion is above or below the optimal rate. To see this starkly, consider two countries with the same endowment of a natural resource, and no other source of production. One country extracts all of its resources in one year, while the other depletes at an optimal rate so that the resource lasts for many years. Clearly welfare is higher in the second than in the first. But the level of genuine savings in both countries is the same (at zero). Going from simple examples to the real world, countries like Norway and Botswana also have lower genuine savings than regular savings, but one doesn’t normally think of them as countries where people are suffering.

In short, while Where is the Wealth of Nations is a carefully done piece of analysis, it is incorrect to say that it provides evidence of “looting” or even of the resource curse. The latter has much more to do with how governments have used resource revenues. In too many African countries, these revenues have been spent on unproductive public investment projects, which is why growth has been anemic and poverty reduction even slower. This is the problem we are working on, including with initiatives like the Extractive Industries Transparency Initiative and the Natural Resource Charter.

On your second point, I would first note that not all the growth in Africa over the past fifteen years has been from resource extraction. Twenty-two non-oil-exporting countries (home to a third of the African population) experienced higher-than-four-percent average annual growth between 1998 and 2008. Furthermore, if you look at the economic policies these countries followed, they included fiscal and monetary stabilization—median inflation in 2005 was half what it was in 1995—more open trade regimes, and relaxation of some of the most prohibitive regulations in the economy. While other factors, including increased external resources (aid, debt relief, remittances, and private capital flows) and a buoyant global economy played a role, it is hard to escape the conclusion that the economic policies pursued by these African governments contributed significantly to their economic performance during the last fifteen years. To be sure, the policies were not the same across countries, and they varied in their timing and sequencing. But this corroborates my point that the policies, while consistent with the Washington consensus, were tailored to countries’ circumstances because they emerged from a domestic political consensus.

Comments

Despite having access to the technology to help alleviate global problems like starvation and famine, world governments haven’t found a cost efficient way to work together to solve them. Although wealthier nations do send aid throughout the world it’s still difficult to ensure that the people who are suffering actually receive the help they need. Corruption is prevalent throughout the world and to some degree even in developed western nations. As the world continues to become more complex, Rebecca Costa discusses the reasons her book "The Watchman's Rattle", is meant to resolve these problems.

1) We should first distinguish between renewable and non renewable natural resources.
2) We need also to have the real value of these resources and the distribution of the benefits from these resources.
You say “The reason is that, with any natural resource, there is an optimal rate of depletion that maximizes economic welfare, and that rate is typically not zero. “ no really so!!!!.
If we talk about non renewable resources Yes!!! But even so… I would think also that there are evidence of “looting” or even of the resource curse
There is a lot of money from big mining in Madagascar, and since the quality of the resources and its awfully low prices have attracted serious and non serious FDI, I do think that it is just a curse since, It is miserable to say that the compensations are ridiculous and those who give the monies to these people should look and reflect into the mirrors. Have you seen the type of houses give to the people? Or how the monies were dispatched to let the people immerse themselves into alcoholisms plunged again into poverty.
I do agree there is a lot for corruption and misuses of receipt from these FDI. There are lack of preparation on local and national government. But let’s also face it what are the responsibility of those who are in favor and pushing these investments to go forward??? Donors’ community including the World Bank.
On renewable natural resources, if you get into productive system but not solely relying on natural resource regeneration capacity you will improve greatly the resource carrying capacity and be also enable to have greater production. Up to know, most of I have seen from donors assistance, favors as this other person said in favor of FDI coming from their own kindred, while having limited impacts to the country and its people.
Let’s take also for example on renewable resources: forest resources the case of precious tropical timber case of rosewood and palissander of Madagascar. I did not see any hard investment to go into forest industry operations. There were US $ 450 millions invested in the 3 phases environmental program but for what??? to support consultancy, institutionalizations of the environment, support all aspect of research and development of International NGO. In fact, before the actual political crises, the statistics have condemned all the stakeholders. 1.45 millions of hectares of natural forests have evaporated. The country is still amongst the least developed poor country. After the political crises because the impacts of earlier interventions are so “fragile” the “fragile biodiversity hot spot –world heritage has vanished or will be soon vanishing getting these same people to prophesy “imminent ecological disaster”
To conclude: if the people are genuinely informed on the real value of their natural resources, and as you advise “consider two countries with the same endowment of a natural resource, and no other source of production. One country extracts all of its resources in one year, while the other depletes at an optimal rate so that the resource lasts for many years. Clearly welfare is higher in the second than in the first. But the level of genuine savings in both countries is the same (at zero).”
What is the real market value of these products? How these countries could well managed their resources and how as indicated these big countries full of global market knowledge do not only preach but also act in favor of the real interest of these countries… I think we all will benefit more…

Poor Shanta, I guess somebody has to engage and refute the looney ranting anti-market left.
Whereas I am most definitely on your side, I do think sometimes us economists tend to focus too much on income and gdp, making it easy for the anti-market crowd to simply respond that we environmental and societal costs are not adequately captured in these measures.
So it is always helpful to have a couple of additional, non-income statistics of African progress at hand. My two favourite ones are, (with data taken from the WDI):
(1) Adult literacy rates have increased across the continent from 57% in 2000 to 66% by 2008 - although the data is patchy and we can't show the breakdown at a continent-wide level (or across a longer period of time), I think it is widely acknowledged that the greatest progress has been achieved amongst young women.
(2) Under 5 child mortality was 144 per 1,000 live births in 2008 - still an outrageous 15% of African children die before they are 5 years old. But this is down from 17% in 2000, 19% in 1990 and a shocking 24% in 1970.
If people like Patrick Bond cannot admit that these huge steps forward in education and health are signs of broader increases in wellbeing I just think they do not deserve to be taken seriously.

While I entirely agree with the first 2 paragraphs above, several of the 22 high growth countries are likely in the many mineral rich/dependent countries that have had much higher growth in the last 10 years or so.
I put together a table (available on reguest-format breaks up when I tried to post it) of the growth rates of 22 mineral (non-oil) dependent countries around the world from 1989-98 and 1999-2008. 15 are in Africa. (Mineral dependent is partly as defined by the IMF but I also added some countries that have become big mining countries in the 2000s.) The average annual growth rate of GDP increased from 0.95% per year to 5.32%. It should also be highlighted that in roughly the same time period, the 12 low income SSA countries in the same sample had an 18% increase in their average Human Development Index score.

http://blogs.worldbank.org/africacan/comment/reply/1876
http://links.org.au/node/1843
Many thanks for your reply, Shanta. My rebuttals are interspersed, and they contain a great many details that may detract from the flow of this debate. But they are important, nonetheless, so I risk boring you and any readers with a long argument, a worthy risk because this is a rare chance to compare radical political-economic critique with a bold, unapologetic articulation of the Washington Consensus:
> Patrick. Thanks for bringing the discussion to the blogosphere, where we can communicate directly rather than through a CBC radio interviewer.
> On your first point, we need to distinguish between accounting exercises, such as those in the World Bank’s book, Where is the Wealth of Nations, and measures of economic welfare. Measures of genuine savings deduct the amount of a resource that has been depleted from regular savings to account for the reduction in natural capital. This deduction does not by itself indicate whether human welfare, which is what we are all interested in, has gone up or down.
Agreed. But to determine whether utilisation of resource flows contributes to human welfare requires a political-economic analysis of who wins (and who loses). This would take the World Bank places I don't think it really wants to go - and by that I don't mean 'optimal rate of depletion', I mean class analysis (and gender/race/environment analysis, too). To illustrate this dimension of human welfare, there's a very recent case I have in mind, here in South Africa, where World Bank project lending reveals a great deal about why Africa suffers from resource curse (see below).
> The reason is that, with any natural resource, there is an optimal rate of depletion that maximizes economic welfare, and that rate is typically not zero. So the relevant question for signaling directions of welfare is whether the current rate of depletion is above or below the optimal rate. To see this starkly, consider two countries with the same endowment of a natural resource, and no other source of production. One country extracts all of its resources in one year, while the other depletes at an optimal rate so that the resource lasts for many years. Clearly welfare is higher in the second than in the first. But the level of genuine savings in both countries is the same (at zero).
But that is not the World Bank methodology deployed in the book Where is the Wealth of Nations? The measure of genuine savings for Country 1 would be dramatically negative in the year under consideration (2000), and for Country 2 it would be much reduced: stretched over time depending upon the rate of resource exploitation. That's why that book is important, it takes a snapshot of a given year (2000), and although we don't have information on rates of exploitation (your point), that doesn't detract from the clarity of the overall picture: Africa's resources are being extracted and exported, and reinvestment in physical and human capital is insignificant. So genuine savings are negative, without those backward/forward linkages and reinvestment. Africa is becoming progressively poorer once we adjust GDP to include the debit on non-renewable resources ripped from the ground without corresponding productive reinvestment. The numbers in question became much greater since 2000, as a result of the rise of commodity prices and hence of natural resources valuations.
> Going from simple examples to the real world, countries like Norway and Botswana also have lower genuine savings than regular savings, but one doesn’t normally think of them as countries where people are suffering.
There are resource curse problems in both, even in Norway where an overvalued kroner has caused Dutch Disease, but yes, Norway at least turns its oil revenues into free university education and highly-productive infrastructure and public/merit goods, unlike most oil-rich countries run by despots. Moreover, Norway's vast oil investment fund means there's extremely strong intergenerational equity, a factor lacking nearly universally in resource-cursed societies. That permits a $5708 genuine savings calculation for Norway in 2000 (according to your colleagues), and hence its genuine savings rate (18.5%) lags only a handful of countries (mostly East Asian). Norway's government has mainly been social democratic over the past century, and currently there is probably no more left-leaning government in the north (which is not to say that Norway's international policies are anywhere near the potential promised in the Soria Moria document's governing mandate, such as the broken promise to move Norwegian multilateral funding out of the World Bank, to the UN).
But of far greater relevance is Botswana where, yes, the 'people are suffering', and not only because long-standing migrant labour relations, patriarchy and rapid urbanisation coincide with one of the world's highest HIV rates. It's also a country whose poorest people, the Basarwa-San ('bushmen'), have been oppressed by the combination of World Bank and DeBeers/Debswana pressure to get them off land so as to facilitate diamond extraction. The Gabarone government has been brutal: denial of water rights is the latest technique, as is well documented (thus contributing to concern that helped pass the UN 'right to water' declaration last month - http://www.youtube.com/watch?v=LKweLxPipU4).
As for the rest of the society, Botswana competes with South Africa and Namibia as the most unequal country in the world. In a 2002 UNU/Wider discussion paper, my economist colleague Guy Mhone (1942-2005) and I worked through some of the problems: "unemployment stood at 10 per cent of the labour force in 1981, increased to 17 per cent in 1984, and reached 22 per cent by the late 1990s... 23 per cent of households remain 'very poor'. The poverty data suggest that growth elasticities with respect to the proportion of the poor that can be lifted above the poverty line as a consequence of a given percentage increase in GDP have historically been very low. Botswana remains locked in an extractive economic mode. Relying on Ogive and entropy indices to measure the degree of diversification, the IMF concludes that the Botswana economy has made little headway, and instead suffers from 'concentration of economic activity in the mining sector and the over-reliance on diamond exports' ... FDI has tended to be lumpy and associated with one-off megaprojects (such as the Hyundai motor assembly plant) whose sustainability has been questionable, especially when incentives expire... The problem arises from temporary or permanent booms induced by increases in prices of a major export commodity, which in turn induce major shifts in resource allocation. In underdeveloped economies, such resource flows sometimes prevent balanced, equitable forms of growth and development. They also heighten the vulnerability of the economy to external shocks if commodity prices decline substantially... Decades of rapid GDP growth and export success were insufficient to diversify and develop Botswana's economy. Typically, blame for such an outcome can be traced to the inadequacy of domestic policies, to structural failures in the economy for which orthodox policies may not be sufficient, or to constraints arising from the global economy. These factors have not been adequately considered in the literature on the Botswana economy, in part due to overenthusiasm of analysts intent upon proving Botswana's role as a success story, and in part due to the general dominance of conventional views of economic management and globalization among policy analysts specializing in Africa... Botswana has failed to transform its high saving rates into investment. During the 1990s, the savings rate was around 40 per cent, while gross investment was between 25 per cent and 30 per cent, suggesting a low capacity to absorb savings in site of the backlog in unemployment... Botswana's rural economy is characterized by extremely unequal access to land and livestock, both of which militate against the broadening of the economic base and the development of industry based on domestic demand... [B]eyond its primary product exports, the benefits of globalization for Botswana are not evident. This not only demonstrates the ambivalent implications of international economic integration for a small and vulnerable developing country that remains a price taker, and cannot significantly influence the pattern of foreign direct investment in its favour. It also shows the limits of the anticipated trickle-down effects of growth on the domestic economy." (from G.Mhone and P. Bond, ‘Botswana and Zimbabwe’, in M.Murshed (Ed), Globalization, Marginalization and Development, London, Routledge Press, 2002, pp.233-247)
> In short, while Where is the Wealth of Nations is a carefully done piece of analysis, it is incorrect to say that it provides evidence of “looting” or even of the resource curse.
It certainly does. The evidence is overwhelming and cannot be denied using your two-country abstraction based solely on temporality. For the given year under study, 2000, the book provides estimates of consistent negative 'genuine savings' in Africa which confirm our worries about the looting of the continent's resources. I wonder if the Bank would permit further research work in this area: was the Where is the Wealth of Nations? project shut down by President Wolfowitz, who like President Zoellick enjoyed such strong ties to the US petro-military complex (and its erstwhile thinktank, the Project for a New American Century)? The concern, here, is that researchers for the Wealth of Nations team were generating knowledge that would conceivably have helped Bank policy-makers and lenders become more conscious of environmental and social externalities associated with natural resource extraction, but instead, its chief economist for Africa alleges that Africans are getting wealthier, when the evidence of Africa losing natural resources on unfair terms is glaringly obvious.
> The latter has much more to do with how governments have used resource revenues. In too many African countries, these revenues have been spent on unproductive public investment projects, which is why growth has been anemic and poverty reduction even slower.
Fine, now we're getting somewhere: a concession that resource extraction isn't intrinsically beneficial to Africa. Yet the claim that the revenues from non-renewable resources merely went to 'unproductive public investment' (meaning what? - grants to the permanently unemployed and other social wage expenditures?) distracts our attention from at least four other financial sources of African underdevelopment: local elite capital flight (extreme in most resource-cursed countries), corruption (which the World Bank has generously supported for decades), outflows of private capital (usually profits and dividends but also illicit transfer pricing), and Odious Debt repayments. These are all wicked problems in resource-cursed economies, and in each case facilitated by the Washington Consensus.
Indeed, Bank WashCon conditionality - such as financial liberalisation and Foreign Direct Investment promotion - amplifies these problems, via undemocratic power relations. Yes, African elites are more readily corrupted than counterparts elsewhere, given the lack of a strong countervailing civil society and patriotic business class, to be sure. But World Bank nurturing of African malgovernance over the decades, including at present, offers a consistent explanation for the 'unproductive public investments' strewn across our landscape. There are myriad examples in Southern Africa with which I'm intimately familiar, including the biggest and latest: your institution's 15th loan to post-apartheid South Africa, for the Medupi power plant. Read on.
> This is the problem we are working on, including with initiatives like the Extractive Industries Transparency Initiative and the Natural Resource Charter.
Look, it really is impossible to take this sentence seriously, just a few weeks after World Bank board approval of its largest-ever project loan, $3.75 billion granted to Pretoria (specifically, the parastatal Eskom) to build the world's fourth-largest coal-fired power plant, Medupi. That loan illustrates at least ten scandals, which in turn demonstrate why the Bank's role in African resource extraction is so consistently destructive:
* climate-busting emissions (at a time SA is already about twenty times worse than the US in per capita carbon emissions economic intensity) given that Medupi alone will produce more greenhouse gases than do 115 countries (25-30 megatonnes of CO2equivalents/year);
* local ecological destruction and health burdens (Medupi has no scrubbers due to ‘relative lack of pollution’ nearby, yet ambient SO2 standards are already exceeded; the area is dry yet vast water inflows are required; and 40 new coal mines will open to feed Medupi and the next powerplant, Kusile, although these mining areas suffer severe water degradation and mercury emissions, with demonstrated adverse public health burdens for local residents, as the WB Inspection Panel is now learning);
* virtually no public participation in the WB loan-investigation process last December, and profoundly flawed internal procedures replete with violations of due diligence;
* the cost of the loan will inordinately be borne by poor South Africans, who already pay excessive prices (about US$0.10/kWh) in comparison to multinational corporations (average of less than $0.05/kWh) and face 25% annual price increases (with inflation at 6%) in coming years; leading to
* an upsurge of electricity disconnections, social strife and state oppression, which already contribute to South Africa's rating at the top of the world scale of per capita protests;
* the benefits of the Bank loan go overwhelmingly to two multinational corporations, which receive ultra-cheap power (at about US$0.015/kWh) based on 40-year, corrupt, apartheid-era "Special Pricing Agreements" kept secret until whistleblowers exposed them in early 2010 (even though the Bank was considering making this loan in 2009, and failed to reveal this travesty - so much for EITI);
* the outflows of profits/dividends to those same MNCs (BHP Billiton and Anglo American Corporation) and other resource-extraction firms are having a severe impact on SA's current account deficit, which is amongst the highest of any emerging market, and which in turn led The Economist to rate South Africa as the world's riskiest emerging market last year;
* with the additional $3.75 billion in foreign debt, South Africa is entering a debt trap (largely to cover the soaring current account deficit since 2001, when SA firms were allowed to list offshore) - at the end of apartheid it was less than $25 billion but is now nearly $85 billion today - and we will soon reach the same levels in relation to GDP as in 1985 when SA had one of world's worst foreign debt crises, and the apartheid regime was compelled to default on loan repayments;
* partial privatisation of SA energy generation is one of the features of the loan that the Bank highlights positively, even though the record of utility privatisation in South Africa (telecommunications, roads, electricity and water) has been nothing short of disastrous;
* corruption of SA's ruling party via Bank funding is shocking, and on these grounds our main business newspaper (Business Day) and most opposition parties formally rejecting the Medupi loan, since a huge cost overrun for Medupi's boilers results in Hitachi (partially owned by the African National Congress) receiving massive profits which will, in turn, help keep this corruption-riddled ruling party in power for decades to come;
* this loan simply continues the Bank's apartheid-era history, in which $100 million in loans were made to Eskom from 1951 (three years after formal apartheid began) to 1967, during which time zero black households received electricity, although huge companies and wealthy whites did, while the entire society (black taxpayers too) had to repay those loans - quite a deja vu in relation to Medupi, isn't it?
Shanta, there are about 550 pages of press clips about this Bank loan, from January-May 2010, explaining these scandals in more detail - http://www.ukzn.ac.za/ccs/files/WB%20eskom%20press%20clips%20Jan-May.pdf - and while I notice that you recently had a debate with Oxfam's Barbara Stallings about whether it is appropriate to blame the victims (underpaid African civil servants in health and education) for 'quiet corruption', it is curious how quiet you have been about this rather revealing loan.
This is just the latest and largest example of how the World Bank contributes to the African resource curse and corrupt regime-maintenance. I hope to be proven wrong, but I doubt there are rebuttals to the ten points above. Even more shocking is that the climate mitigation system that the Bank helped set up through its Prototype Carbon Fund, the Clean Development Mechanism, is now considering giving Eskom even more Medupi financing, demonstrating yet again the destructive role of carbon trading in Africa, under Bank tutelage. (The Bank prototype for South African carbon trading is methane-electricity conversion at the continent's largest landfill - it's where my rubbish goes to rot because we don't have a zero-waste system in Durban - and you will struggle to find a more extreme case of environmental racism than Bisasar Road.) While the WB Inspection Panel is currently investigating the adverse effects of this loan on some of the communities (albeit with no power to recall the loan), it's obvious to all who look at this project that Bank involvement in EITI and the Natural Resource Charter is, in this context, merely farcical greenwashing.
> On your second point, I would first note that not all the growth in Africa over the past fifteen years has been from resource extraction. Twenty-two non-oil-exporting countries (home to a third of the African population) experienced higher-than-four-percent average annual growth between 1998 and 2008.
The 2002-08 commodity boom extended beyond oil, to minerals and cash crops, of course. And again to remind, only a handful of tiny African countries actually 'grew' when we take into account genuine savings, as shown in the Bank's Where is the Wealth of Nations? Moreover, the crucial dummy variable missing is civil conflict. Once that is accounted for, the 29 non-oil-exporting African countries which did not suffer and then recover from severe conflict did no better in the 2000s than the decade earlier, recent Unctad research suggests.
> Furthermore, if you look at the economic policies these countries followed, they included fiscal and monetary stabilization—median inflation in 2005 was half what it was in 1995—more open trade regimes, and relaxation of some of the most prohibitive regulations in the economy. While other factors, including increased external resources (aid, debt relief, remittances, and private capital flows) and a buoyant global economy played a role, it is hard to escape the conclusion that the economic policies pursued by these African governments contributed significantly to their economic performance during the last fifteen years.
I agree that the WashCon was imposed in Africa. But let's turn to a different source to understand the basis for the economic 'growth'. Here's Prof John Weeks of the Univ of London's School of Oriental and African Studies, reporting in a background paper - "Employment, productivity and growth in Africa south of the Sahara" - for a forthcoming Unctad report (brought to my attention by Prof Jayati Ghosh of Nehru Univ in Delhi):
"from 1990-2009... policymaking was heavily influenced by IMF and World Bank programmes, yet the long delayed recovery of the region was primarily the result of external factors rather than so-called policy reforms. The economic recovery of the second half of the 2000s came to an end with the global financial crisis of 2008... The so-called Washington consensus type policies that characterised the structural adjustment programmes of the 1980s and persisted into the 2000s were associated with lower growth. The possibility that they addressed and overcame obstacles to growth, thus laying the basis for a subsequent recovery, is considered below and rejected as not empirically substantiated... more than twenty years of so-called policy reform had limited impact on strengthening the potential for rapid and sustainable growth in the sub-Saharan region. The drivers of the brief recovery during the second half of the 2000s appear to have been a commodity price boom, debt relief and a decline in domestic conflicts. A major factor that had previously constrained growth, growth of import demand, remained operative... With regard to policy, the lack of diversification in national production results in a low capacity to tax. For countries that are overwhelmingly agricultural, the capacity to tax is severely limited by government’s inability to estimate farm income or production. Reliance on taxation of companies extracting natural resources results in instability of public revenues due to fluctuations in commodity prices. As a practical matter, increasing the capacity to tax requires diversification into manufacturing. The stress by Washington Consensus policies on so-called comparative advantage has been a prescription for non-development in the sub-Saharan region. If in any other region the pattern of trade is determined by a comparative advantage based on the relative prices of primary factors, such is not the case in the sub-Saharan region. Among these countries, the export structure reflects natural resource endowments not so-called factor endowments. This basis for trade results in volatile exchange rates that respond to the volatile commodity prices."
> To be sure, the policies were not the same across countries, and they varied in their timing and sequencing. But this corroborates my point that the policies, while consistent with the Washington consensus, were tailored to countries’ circumstances because they emerged from a domestic political consensus.
This notion of a 'domestic political consensus' is quite a stretch. In South Africa, the wealthiest African economy (celebrated for loyally following WashCon prescriptions from 1996-2008), this alleged policy 'consensus' - the World Bank-designed Growth, Employment and Redistribution strategy and its successors - was imposed without consultation and had some telling results: failure to meet nearly all targets set in the Bank econometric model, increasing inequality (higher than apartheid!), sustained levels of extreme unemployment, more currency crashes than any other comparable economy, extreme distortions in production/consumption, excessive consumer credit vulnerability, an unprecedented property bubble (six times worse than the US's), and severe capital flight - all of which contributed to the putsch of the pro-WashCon president, Thabo Mbeki, in 2008, at the very height of the (false) economic boom. Thousands of community protests (recorded by police) each year and the ongoing levels of organised labour mobilisation (a national civil service strike this week, for example) reflect not consensus but rising class conflict. This is the result of the way the World Bank, IMF and donors - allied with corrupt local elites - have engineered 'growth' in one of the most prosperous corners of Africa. Elsewhere on the continent, the misery and eco-destruction created by free-market dogma and uncompensated resource extraction have been far worse.
Thanks, anyhow, for taking the trouble to reply.
Cheers,
Patrick

Patrick
I really, really believe you're wasting your time talking to these people and engaging them in any kind of debate. If I have learned anything at all (from working with them) and elsewhere, it would be that they consider Africa to be the petri dish for their theories. They care naught for the people of Africa, only that their own theories are proven/disproven; they see Africans not as human beings, but as factors in the thickets of algebra behind which they hide. They care only for success in their formulae on paper....
I left the Bank nine years ago (to do the PhD), so I have kept my mouth shut for long enough: In late 99 early 2000, while working on a paper/speech for Joe Stiglitz, I called Shanta one evening and told him about the rampant homophobia and undemocratic ways of Museveni and asked whether we ought to say something on that. You may recall that at the time Nujoma and Mugabe were referring to gay people in the most offensive and cruel manner. Museveni agreed with them. Shanta's words to me were: "No, no, we should praise him for getting the macro-economics right." (I made a record of all their remarks; the self-righteous, egregious, cruel and duplicitous remarks all the way from the top to the bottom)
So, Patrick, you're making a big mistake talking to these people. They simply do not care; trust me, they have inflicted the worst structural violence on African society - and they will get away with it. As for comments like "a world free of poverty," that's just rhetoric, cant and spin....The care only for their own theories, to protect their personal income, for extending the "logic" of western economic rationalism into homes and hearts of Africans - then discipline and punish people for wanting to live their lives on their own terms. We may say that they contribute to the looting of Africa, they will tell you that someone is drinking clean water somewhere on the continent, we will say that they prepare the continent for greed, exploitation and capitalist expansion (read: western country or corporate control of the continent), they tell you that their data shows some increase in some factor based on some Neo-Classical Economic theory.
Don't waste your time, Patrick. Here is a challenge I have always wanted to present to them (since 1985), when I was a reporter in South Africa: If they care so much about Africans and if Africa is where they do most of their work, why do they not move to a country in Africa?
Because many careerists and other odious types - trust me, I have seen even National Rifle Association accessories on one senior staff member when I came to work on a Saturday - may not want to work on the continent.
Because their masters at the Treasury and White house may not allow them to move.
Because our leaders in Africa may not enjoy traveling to Dakar, Kinshasa, Antananarivo, or Maputu; they will probably vote against the move.
Another final thing (speaking of our leaders). When Paul Wolfowitz was appointed (the man who carries a lot of blame for the mass murder in Iraq), I sent out a request to the Bank and asked if there were any records of the process of voting or nomination or confirmation, and that I wanted to see whether any Africans (especially Trevor Manuel) had rejected, objected or even mentioned the callousness and cruelty of the man. They were silent.
Silence, in cases of mass murder (Iraq) and structural violence (Africa) is complicity... There is nothing in the Economics textbooks about this, so why should they care? Really?
Don't waste your time, Patrick.
Peace
Ismail
Ismail

Hmm... so much for my vacation in London...
Anyway, as principal author of "Where is the Wealth of Nations?" I should offer my 2p worth. Shanta is of course right that, once you have discovered a natural resource, either over- or under-extraction will decrease social welfare from its optimal level. And inefficient public investment is a good way to waste the potential benefits from the gift of nature.
On measures of 'adjusted net' or 'genuine' saving there is a much simpler point to be made. If net saving is negative then social welfare is decreasing. Comparisons between net saving and GDP (as on Mr. Bond's blog) are really comparing apples and oranges.
So the real issue is whether net wealth creation is occurring. Our saving numbers show that for most mineral and energy extracting developing economies it is not, including most resource-extracting African countries. High government consumption expenditure is often the culprit in this, and bad governance and bad institutions can compound the problem (this is a key plank in the resource curse literature). On Shanta's point, if governments are investing resource rents, rather than consuming them, but doing so very inefficiently, then this is truly a waste.
Here is another way to tell the story: resource rents (the economic profits on resource extraction) are like free development finance -- no interest, no repayment, no conditionality. Governments are, of course, sovereign and can choose to use the rents to finance investment or consumption. If the alternative is starvation, there is no choice -- you consume the rents. Generally speaking, however, governments seeking to increase social welfare will invest the rents -- in infrastructure, in human capital, or stronger institutions.
We are about to publish a new book, "The Changing Wealth of Nations", which sheds important light on Shanta's generally upbeat story about African development. Comparing total wealth estimates for 1995 with 2005, we find that 'intangible capital' (the sum of human, social and institutional capital) has increased strongly in most African countries, with DRC, Nigeria and Zimbabwe being notable exceptions. This is very good news -- human capital is clearly important for development, and social and institutional capital are very closely linked to what economists call 'total factor productivity.' The evidence suggests that African countries are starting to use their physical assets much more efficiently.

Dear Mr Hamilton
Thank you for taking the time to respond.
Just a quick thought on the primary causes underpinning extractive economies negative wealth creation ...
"So the real issue is whether net wealth creation is occurring. Our saving numbers show that for most mineral and energy extracting developing economies it is not, including most resource-extracting African countries. High government consumption expenditure is often the culprit in this, and bad governance and bad institutions can compound the problem (this is a key plank in the resource curse literature)."
The primary cause of the resource curse has long been misinterpreted - perhaps deliberately so, usually identified (and isolated) as demand-side corruption on the part of developing governments...Yet as hard figures reveal, this accounts for 3-5% of illicit flight...More than 60% of revenue (80-90% remaining permanently offshore) is the product of corporate mispricing...But as the geography of corruption has conveniently been limited to demand-side factors (rather than broadened to include supply-side services facilitating the activities precipitating the 'curse' as well as the jurisdictions on the receiving end of Africa's looted wealth such as the US's Delaware, Switzerland, and UK's City of London, host to much of the world's secrecy jurisdictions) the reasons behind the Bank's timidity and dishonesty can be guessed at....The Bank's history of peddling vast sums to odious dictators and autocratic regimes is, I would dare say, a key plank in the blueprint of the resource curse, enabling these 'self-regulated' multinationals to exploit resources at will, financing rentier regimes operating independent of citizens, eroding the tax base not simply through tax avoidance and evasion (not a significant factor in your report, I would imagine) but also tax competition. The Bank has very little legitimacy in Africa as an honest examination of the most crucial issues (corporate country reporting, mandatory information exchange etc etc) is intentionally marginalised in favor of formulas that seek to misrepresent the artificial causes of the continent's poverty, inequality etc. Not only is such dishonesty shameful, but it is also deadly.

Greetings Kirk,
Thanks very much for your intervention. First, a round of applause to the Bank for publishing the book of conference proceedings, Where is the Wealth of Nations? (And I shall immediately retract the charge that two neo-conservative Bank presidents may have hampered further work, now that I know the team is valiantly proving that African intangible capital is soaring - all my anecdotal empirical observations to the contrary, especially in South Africa where your thesis and data will be carefully examined.)
Given that the Wealth of Nations research supports my position (worsening African poverty), not Shanta’s, I’ve been trying to read your post with an eye to other moves and the sliding narrative. Have I got this right?
> KIRK: Anyway, as principal author of “Where is the Wealth of Nations?” I should offer my 2p worth. Shanta is of course right that, once you have discovered a natural resource, either over- or under-extraction will decrease social welfare from its optimal level.
Of course! No dispute.
By the way, does the Wealth of Nations team now include the adverse impact of extracting fossil fuels into the equation? Out here in the climate justice camp, we have a slogan - “Leave the oil in the soil, the coal in the hole and the tar sand in the land!” (catchy?) - and it strikes me that if you’re serious about ‘social welfare’, that slogan could become a key consideration for identifying ‘optimal’ extraction. Especially if you live in Russia, Pakistan and China this month, along US beaches on the Gulf of Mexico this year, and in Africa or the Andes or Himalayas or coastal zones or low-lying islands *anytime* this century.
(Other concerns about the Wealth of Nations methodology are the use of contemporary international pricing - not potential future values when scarcity becomes a more crucial factor, especially in the oil industry - and the need to more fully estimate damages done to the local environment, to workers’ health and safety, and especially to women in communities around mines. And doesn’t the use of average - not marginal - cost for calculating resource rents also underestimate the depletion costs?)
> KIRK: And inefficient public investment is a good way to waste the potential benefits from the gift of nature.
Yes, I’m hoping my query about what these three words *actually* mean merits a reply. I desperately hope that Shanta isn’t referring to the social wage, as do so many others in Washington these days. Anyhow, as you may have heard, our South African government has become one of the world’s expert practitioners in inefficient public investment (see earlier post on Medupi as a case study). Did you turn on the telly last month to observe how we blew a cool $3+ billion on ten World Cup stadiums? Just as predicted, our Parliament heard on Monday that they will all become white elephants, as no one can afford to play in them. Eish, what a hangover we have! (Not just from those dratted vuvuzelas!)
> KIRK: On measures of ‘adjusted net’ or ‘genuine’ saving there is a much simpler point to be made. If net saving is negative then social welfare is decreasing. Comparisons between net saving and GDP (as on Mr. Bond’s blog) are really comparing apples and oranges.
I especially like your apples, Kirk. And I compare them to oranges when appropriate, such as in the ratio of net saving/GNI used in the Where is the Wealth of Nations? book (Appendix 3). And there’s an orchard we know well - located at 18th&H Sts, NW - where both grow in close proximity. So let’s look more closely in order not to degenerate into semantic games. For here’s where I think the problem began, on a radio show last week, where from my argument about Africa being ‘poorer’ using your net dissaving concept (the shrinking apple), Shanta jumped to GDP (the expanding orange):
> SHANTA: I just want to correct one of the facts, which is that the continent is not poorer per person. GDP per capita is not lower today than it was ten to fifteen years ago. In fact, it is considerably higher.
My reply (in the article posted at the Links website): Here, Devarajan abuses the discussion about African poverty by using the Gross Domestic Product (GDP) measure, even though just seconds earlier I had warned against doing so. African economies suffer extreme distortions caused by the export of irreplaceable minerals, petroleum and hard-wood timber. Were he honest, Devarajan would confess that GDP calculates such exports as a solely positive process (a credit), without a corresponding debit on the books of a country’s natural capital.
So Kirk, are your people not able to educate Bank economists about these thin-apple, fat-orange relationships? Why do they keep measuring practically everything in GDP, given its huge flaws and severely underdevelopmental policy implications in Africa? (And while we’re at it, could your team consider adopting an even more expansive strategy that utterly demolishes GDP, such as the Genuine Progress Indicator, at http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm ?)
> KIRK: So the real issue is whether net wealth creation is occurring.
Agreed, and so that means when I say that Africans are growing poorer, it implies that we should be including the ‘net’ stuff in our soil - like gold, platinum, titanium, coal, coltan, oil and other non-renewables (especially diamonds, which for reasons that aren’t too convincing, your team left out).
> KIRK: Our saving numbers show that for most mineral and energy extracting developing economies it is not, including most resource-extracting African countries.
Yes, my gut feeling, as well.
> KIRK: High government consumption expenditure is often the culprit in this, and bad governance and bad institutions can compound the problem (this is a key plank in the resource curse literature).
Yes, you got that right. What’s is possibly the most influential institution in Africa, the World Bank, is a pretty good example of *bad*, eh. (Not baaaaaaaaad. Just bad. Again, see Medupi case in point.)
> KIRK: On Shanta’s point, if governments are investing resource rents, rather than consuming them, but doing so very inefficiently, then this is truly a waste.
Let’s talk about waste. I lived a long while in Zimbabwe, and I’ll never forget when the IMF endorsed the Harare regime’s use of its structural adjustment loans to fund the looting of the DRC via military occupation, so long as the money was redirected from elsewhere in the budget. Fungibility! (By the way, does the Bank have a position on Zimbabwe’s Marange blood diamonds? Yes, it’s Mugabe’s same pesky generals at work again. So do please include diamonds in the next Wealth of Nations report if you can; Marange is probably the biggest find since Kimberley in 1867.)
> KIRK: Here is another way to tell the story: resource rents (the economic profits on resource extraction) are like free development finance -- no interest, no repayment, no conditionality. Governments are, of course, sovereign
Where, Kirk? Not here! (Have you ever been to Africa?) Yes, we may have capital cities, but the continent’s policy hq is at 18th&H Sts, NW. But you know that.
> KIRK: and can choose to use the rents to finance investment or consumption.
Right, but let’s be frank about your missing two words: “or looting”. (Is that in the Wealth of Nations equation? Ah, but we learned from the Bank’s Africa Development Indicators 2010 report about ‘quiet corruption’, carried out ‘most prominently’ by teachers and doctors. No African head of state would conceive of opening a bank account to deposit ‘rents’ in the City of London, Zurich, Brussels, Citibank, Riggs or Rio. That’s just unthinkable. Or, at least, unmentionable.)
> KIRK: If the alternative is starvation, there is no choice -- you consume the rents. Generally speaking, however, governments seeking to increase social welfare will invest the rents -- in infrastructure, in human capital, or stronger institutions.
Where?! Can we get real? We recently tried a game called the African Peer Review Mechanism to do just that. But no one wanted to play. Not even Thabo Mbeki!
> KIRK: We are about to publish a new book, “The Changing Wealth of Nations”, which sheds important light on Shanta’s generally upbeat story about African development.
Light? Getting to know you chaps through this discussion, I’d say a high-intensity low-glare spotlight may be needed here. Do you do peer review? (And I don’t mean amongst economists - the world financial markets can testify that World Bank economists got that one wrong by roughly 50% from October 2008 to March 2009.)
> KIRK: Comparing total wealth estimates for 1995 with 2005, we find that ‘intangible capital’ (the sum of human, social and institutional capital) has increased strongly in most African countries, with DRC, Nigeria and Zimbabwe being notable exceptions. This is very good news -- human capital is clearly important for development, and social and institutional capital are very closely linked to what economists call ‘total factor productivity.’ The evidence suggests that African countries are starting to use their physical assets much more efficiently.
Phew, thanks, I was getting worried there, especially about our most expensive new toys, I mean physical assets: the Gautrain fast train from Joburg airport to the financial district, the overpriced badly-located King Shaka International Airport, the ‘ghost on the coast’ called the Coega Port and the multiply-corrosive Medupi power plant. Can’t wait for your stats, as an antidote to my fears!
Cheers,
Patrick

Until rural Africans rediscover their sense of Self by being empowered to participate in the process of securing their OWN water, nutritious food security and shelter, their actions will come from a place of need and not desire

African human welfare is a contentious issue, it is fair to argue, albeit simplistically, that the current conditions of poverty and structural violence have to a very large extent been exacerbated by exogenous economic and political actions deriving from international financial institutions, as such, options of Samir Amin's de-linking option is one avenue that may lead to an improvement in the welfare of an already impoverished African community, in other words,home growth solutions for domestic socio-economical and political problems.

I am really happy to read, that at least some has brought this issue in lime light. I totally agree that the revenue being generated from export of raw material is not being utilized as it is supposed to be. I request the influencial people to look into the matter and improve upon things. Thanks